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April 11, 2018

Legal Update
William L. Boesch

Client who lost lawsuit after misleading buyers of plumbing business had valid malpractice claim against overconfident lawyers

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A Massachusetts Superior Court judge has refused to dismiss a legal-malpractice claim against two lawyers who unsuccessfully defended a lawsuit arising from the sale of a plumbing business. In that suit, having turned down a pre-trial settlement for $700,000, the client was forced to settle after trial by paying $1.6 million. While the client’s unhappiness with that result (after having spent $600,000 in legal fees) is hardly surprising, the decision that the malpractice case should continue is difficult to reconcile with governing law on the limits of a litigation lawyer’s duties in counseling about litigation risks.

The case, Donarumo v. Phillips, began with client Andrew Donarumo’s sale of his plumbing business to Michael and JoAnn Furlong for $1,000,000. In discussions leading up to the sale, Donarumo told the Furlongs, who had limited relevant business experience, that the plumbing company was in good health and could be run by its remaining staff, that Donarumo himself would remain involved for the first three months as a consultant, and that he would also agree not to compete with the business within a specified region for five years. As part of the sale, Donarumo also leased the business premises to the Furlongs, and partially financed the purchase, taking two promissory notes and security interests in two vehicles.

Within a year and a half after the deal closed, the plumbing company failed. Donarumo accelerated the notes, sought to evict the Furlongs from the premises, and repossessed the vehicles. The Furlongs filed for bankruptcy protection, and lost their home and an investment property to foreclosure. They later sued Donarumo, asserting that his pre-purchase representations about the business had been untrue, and that he had breached his commitments, incorporated in the purchase agreement, to assist in the transition and avoid competition.

Donarumo hired the defendant lawyers, Jeffrey Phillips and Daniel Treger, to defend him. According to the malpractice judge’s summary of the evidence in his summary-judgment decision, over the course of the next five years of litigation, the lawyers “consistently conveyed” the view that Donarumo “had a very strong defense to the Furlongs’ claims and… were likely to prevail at trial”; that indeed the Furlongs’ claims were “frivolous” and the product of their inability to accept responsibility for their business misjudgments; that while the damages sought included the entire $1,000,000 purchase price and other elements, at most the Furlongs would be entitled to the $188,000 in fees that Donarumo had earned on jobs allegedly in violation of his non-compete agreement; and that while the case included a claim under Chapter 93A there was little or no reason for concern about an award of multiple damages or attorneys’ fees. Donarumo ultimately offered the $188,000 in settlement before trial. The Furlongs opened with a demand of $1,000,000, and later reduced the demand to $700,000. Donarumo rejected that demand, and never offered more than the $188,000.

For reasons that are unclear from the record, Donarumo and the Furlongs agreed to submit their entire dispute to a bench trial, which took place in the spring of 2012. More than a year later, the trial judge in that case issued her findings and rulings. As summarized in the malpractice decision, the trial judge “did not credit Mr. Donarumo’s testimony,” and concluded that at the time of the deal with the Furlongs he had been “prepared to say whatever he needed to say”—in particular, about his post-sale plans and the expertise needed to run the business—“to induce the Furlongs to make the purchase.” The trial judge also found “overwhelming” evidence that after the sale, Donarumo had violated his non-compete agreement and “compromised the goodwill” of the plumbing company.

On this basis, the judge found for the Furlongs on both their claim of fraud and their contract claims, found that Donarumo had acted willfully in violation of Chapter 93A, and therefore found that he was liable for double damages and attorneys’ fees. Donarumo subsequently settled for $1.6 million.

He then brought the malpractice case against his lawyers, claiming that they had underestimated, and thus failed to advise him of, the risks of an adverse outcome such as the one that occurred. He also claimed that the lawyers had substantially overbilled him.

At summary judgment in the malpractice case, the lawyers’ most important argument was that they were entitled to dismissal under the principle, discussed in the 2004 Massachusetts Appeals Court case Coastal Orthopaedic Institute v. Bongiorno, that a lawyer cannot be sued for failing to warn his client about the risk that his own testimony may not be believed.

The client in Coastal Orthopaedic, like Donarumo here, charged that its lawyer had oversold its chances of success in defending an employment-discrimination case. The lawyer obtained summary judgment dismissing the malpractice case by successfully arguing that the adverse outcome in the underlying trial stemmed not from an absence of plausible defenses, but from what the decisionmaker (an arbitrator) found to be the client’s own lack of credibility. (As the decision summarizes the result, it was “based on the arbitrator’s rejection of the veracity of the testimony of Coastal’s principals that they had terminated the contract out of concerns about the quality of [plaintiff’s] work, a finding that these purported reasons were a pretext, and an ultimate determination that discriminatory animus underlay Coastal’s actions in terminating the contract.”) The Appeals Court held that the lawyer could not, as a matter of law, have a duty to protect the client against the risk that the client will not be believed.

The judge in Donarumo acknowledged the decision in Coastal Orthopaedic, but did not attempt to reconcile its key holding with the claims and evidence in this case. Instead, the judge suggested that the defendant lawyers’ “no duty” argument at summary judgment was to be determined based on the “theory of causation upon which the present malpractice claims rest,” a theory the judge chastised the lawyers for “misapprehending.” Donarumo’s contention, the judge explained, was that with proper pre-trial advice about the risks he faced in the Furlong case, he would have settled at or near the $700,000 offered by the Furlongs before trial. The malpractice case was, therefore, a “lost settlement opportunity” case, and in such a case, the judge reasoned, it was no impediment to the client’s proving his claim that the result in the underlying case was the product of the client’s own lack of credibility. Donarumo was entitled in the Furlong suit to “professionally competent and balanced counsel regarding the relative strengths and weaknesses of [his] legal position,” the judge said, and Donarumo had made a sufficient showing that the lawyers failed to provide such advice.

Leaving aside whether this result, on the state of the summary-judgment record in Donarumo as a whole, is correct, the court’s reasoning is flawed. It is no basis for distinguishing Donarumo from Coastal Orthopaedic to say that Donarumo is a lost-settlement-opportunity case. The client in Coastal Orthopaedic made the same contention, that its lawyer should have warned of the risks of going to trial on the age-discrimination claim, and that with such a warning the client would have settled before trial. The question raised at summary judgment in both cases was about the scope of a litigation lawyer’s duty to warn his client about litigation risks, and in particular the distinction between, on the one hand, risks arising from legal or factual weaknesses in a defense—about which risks the lawyer surely does owe a duty of reasonable care in evaluation and counseling—and, on the other hand, risks stemming from whether or not the client himself is or is not telling the truth, and whether he will or will not be believed—about which risks, Coastal Orthopaedic teaches, a lawyer may have a limited duty or none at all.

The Donarumo court appears not to appreciate this distinction or its potential significance in the case at hand. In a footnote, the court analogizes the lawyers’ no-duty argument “to a physician who failed to diagnose cancer denying that he contributed to his patient’s death by pointing to the fact that the decedent had cancer,” rather than acknowledging that the doctor had a duty to provide “a timely diagnosis of that condition and a reasonable plan for addressing its risks.” But this analogy is inapt. The lesson of Coastal Orthopaedic is, again, that while a litigation lawyer surely does have a duty to reasonably “diagnose” legal and factual weaknesses in a client’s case, that duty does not extend to the risk—inherent in every case, and uniquely within the client’s knowledge and control—that the client will ultimately be deemed untruthful.

As we have said, this does not necessarily mean that the lawyers in Donarumo were entitled to summary judgment—does not mean they were right in arguing that they breached no duty to their client as a matter of law. The answer to that question would require careful analysis of (a) the lawyers’ specific analysis and advice on the merits of Donarumo’s defenses, pertaining to matters other than whether or not Andrew Donarumo was telling the truth; and (b) the extent to which the trial judge in the Furlong case took a different view on such other matters, which a reasonable lawyer would have foreseen and warned about, and whether and how such other departures played a substantial role in the adverse decision in the Furlong matter. By too preemptively dismissing the lawyers’ “no duty” argument, the Donarumo court avoided reaching these critical issues.